Essay Example on Different theoretical angles that explain the outsourcing Decision









The aim of this section is to outline the different theoretical angles that explain the outsourcing decision As previously mentioned this topic has been extensively studied by the literature thanks to its multidisciplinary nature These perspectives include business strategy economics and inter organizational relationships Transaction cost economics TCE is known as the most significant theory on outsourcing This concept was developed by Thomas Williamson in 1975 and it combines economic and management theory to determine which is the best type of relation a company will likely established within the market when is deciding whether is appropriate to outsource an activity or not At the end of the exercise companies are mainly motivated by maximizing its efficiency which means they will adopt the form of governance that represents the lowest cost The use of this concept is widely used within the literature as companies consider outsourcing decisions from the cost perspective NOMBRAR ARTICULOS First of all authors William J Baumol Autor Alan S Blinder debate that the use of this concept revolves around the idea that individuals behave opportunistically from a handful of choices one of the parties they will always take the decisions that fulfill their interests as it exist an asymmetrical distribution of the information between the exchange parties 

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Transactions are defined by three main characteristics first asset specificity as it represents a high investment that is specific to the conditions of a singular activity Second by uncertainty since the performance of the activity is unknown and third by frequency because this could be a one time deal Moving into the type of governance that organizations can apply for taking outsourcing decisions Transactions are governed by markets when exists asset specificity deals are made somewhat frequently and uncertainty is low In this case companies will implement contracts for managing its relations with its suppliers These formal arrangements could be either for long or short term In contrast to this form of administration the hierarchical governance proposed that activities must be held within the firm when there are transactional difficulties More precisely high asset specificity and uncertainty persist Lastly an intermediate degree of asset specificity will lead to bilateral relations in form of cooperative alliances between companies Which is known as intermediate governance Several limitations across the literature are found within this concept Starting with Doz and Prahalad 1991 Yves L Doz 1991 that consider it only center its attention into single transactions and only few attention is dedicated to the use of other potential forms of governance for repeated transactions Ring and van de Ven 1992 Peter S Ring 1992 It also fails to point that when it exists a high level of asset specificity uncertainty and opportunism The use of complex collaborative relationships is frequently used across many industries McIvor 2009 An alternate theory that reviews outsourcing decisions and acknowledge other factors than cost is the resource based theory RBV This theory belongs to the strategic body of literature which give priority to the internal resources of the organization as drivers for profitability and strategic advantage The origins of this concept Edith Penrose 1959 within her work she describes the ability of managers of exploiting human and physical resources when producing different products a number of variables that are central to the formulation of this theory 

This Four main authors where selected within this section each one of them developed an approach for tackling outsourcing decisions In the first place Venkatesan 1992 Venkatesan 1992 prepared the bases for future conceptual frameworks for evaluating outsourcing decisions from an strategic perspective This author introduces the concept of strategic outsourcing by directing its attention into three main principles devote more attention into the components that both the firm is great at doing and are considered critical to the final product Second only outsource the units where it was clear that suppliers have a competitive advantage low cost structures and stronger performance On the other hand authors like McIvor 1997 and Probert 1997 take these fundamental aspects introduced by its predecessor core competencies and both internal and external cost capabilities for creating a generic framework for make or buy and outsourcing decisions Probert proposes a methodological approach which involves four levels of analysis an initial evaluation that is based on customer preferences Next a detailed research of the competitors and internal performance of the firm must be done This stage is treated as most the important within the analysis as it captures the relevant data for decision making Then the different set of options are evaluated and finally the optimal strategy is taken On the contrary Cox 1996 has a slightly different approach by focusing more into the importance of finding critical assets within a firm s supply chain Concept that was not used by the two authors previously mentioned Numerous empirical studies have examined the question of why do companies outsource throw the transaction cost perspective

 These studies have a common characteristic all agree that the most relevant factor for subcontracting any activity is asset specificity and that factors as frequency and uncertainty play a second role when explaining the outsourcing of this activities There is an extended body of literature that looks into manufacturing NAME STUDIES However there are other studies that shift their attention into explaining the outsourcing of other service activities within the value chain of the organization For example Anderson and Gatignon 2005 shifted their attention into explaining why companies decide to subcontract their marketing and distribution activities Watjatrakul 2005 Bathelemy and Geyer 2005 outsourcing of information technologies IT Widener and Selto 1999 and Speklé et al 2007 researched the outsourcing of internal auditing Evaraert et al 2008 accounting

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